Average cost of borrowing falls

The average cost of new borrowing from banks for small and medium sized businesses fell from 2.58% to 2.47% in July according to figures out yesterday from the Bank of England.

The decrease was driven mainly by cheaper variable-rate loans, with rates on fixed-rate loans going in the opposite direction.

Across the economy we are seeing a contrasting picture. Big businesses are starting to put their foot to the floor and are investing to grow, while the SME community, so often dubbed 'the heartbeat of the economy', is still playing a waiting game and working to pay down the record debts that have been accrued during lockdown.

To put some numbers behind this statement, UK businesses borrowed £3.7 billion in total from banks in July, up from £1.5 billion in June. Large businesses borrowed £4.9 billion, the highest amount borrowed since April 2020. This was offset in part by small and medium sized businesses repaying £1.2 billion more than they borrowed, the largest net repayment by SMEs on record. Over the past 18 months, SMEs have, unsurprisingly, been net borrowers with average net borrowing of around £2.7 billion per month since March 2020.

So, what does all this mean for you as a current or potential borrower?

  • Interest rates falling, and old loans being repaid faster than new ones are being taken out, shows there is lending capacity available in the market and competition for your business - it is worth shopping around for the best deal.
  • Stories that lending demand is exceeding supply might be true for large businesses, but we've never experienced a bank declining a loan or overdraft because its book is full.
  • We do, however, find that both mainstream and alternative lenders are erring on the side of caution in their risk assessments, no doubt aware of the record levels of borrowing that are still circulating in the economy. A well presented business case is still needed for all but the strongest covenants and smallest loans.
  • You may have taken out a government backed loan as a back-stop rather than for any pressing need. Many businesses are now clearing these liabilities believing the worst to be over. We say think twice about repaying a government backed loan early and think instead about how that spare capital can be put to use. There will never be such cheap or flexible borrowing available again.
  • On the other hand, you could be part of the 45% that has used all the money raised via the government backed loans and are now thinking, where next? Now is a good time to be reviewing your options for refinancing. 
  • All the economic indicators are pointing towards an increase in interest rates at some point soon. The expectation is that it will be small, but this may influence your decision on whether a fixed or variable rate loan is the right one for you.
  • Remember, the interest rate is only one part of the cost of borrowing. Fees can also have a significant impact and it is common for lenders to bolster their margins with fees when interest rates are low. Make sure you fully understand all the costs associated with any agreement you take out, and seek advice if necessary to help you make a like-for-like comparison.

As ever, we are here to help with any support you need.


Photo by Tamanna Rumee on Unsplash

Average cost of borrowing falls

By: Neil Edwards

<< Back to latest blogs

Ready to chat?

Let us help you find the best options.